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The Only Way is Ethics – Co-op Bank Bond Holders Fight ‘Bail-In’

With Thursday’s half-yearly figures expected to show the full extent of the problems at the troubled Co-operative Bank, bond holders have united in their opposition to proposed plans to exchange their debt for equity, and have taken their case to the Bank of England – and beyond!

On 19th June Retail Bond Expert reported that thousands of holders of retail bonds in the troubled Co-operative Bank, faced a loss of income and likely loss of capital as the bank sought to shore up its finances and share its financial woes around (Co-op Bank Bailout Confirms Need for Caution – Retail Bond Expert 19th June 2013).

The bank flagged that there will be big write downs when it announced its £1.5bn capital-raising plans in June to fill the huge hole in its balance sheet as demanded by the Bank of England’s Prudential Regulatory Authority.

The Co-operative Group said it could find £1bn to inject into its banking division, but said it would have to ask bondholders to stump up the rest.

One proposal is to convert the bank’s Permanent Interest Bearing Shares (PIBS), which share many characteristics with retail bonds, into shares to the detriment of investors, often pensioners, who had been attracted by what was promoted as an ethically sound and safe financial proposition.

When its half-year results are announced this Thursday many have predicted a widespread sell-off in the stock, which could leave reluctant share holders feeling further aggrieved.

Mr Bond says... "This episode highlights the inequitable treatment of retail and institutional investors when things do begin to unravel"

Most of the charges relate to large commercial and property loans made by the Britannia Building Society, which merged with Co-op Bank in 2009. There will also be hefty costs for the failed attempt to buy 632 branches from Lloyds Banking Group, which led to the departure of chief executive Barry Tootell.

Despite the bad publicity surrounding the capital shortfall, the bank claims that its core retail and SME operations – which totals 4.7 million customers – have continued to do well.

Details of a £1bn scheme to get bondholders to exchange their debt for new instruments and shares in the bank are not expected to be published until October, despite the fact that there is a December deadline.

The other £500m of fresh capital comes from the sale of the life and savings business to Royal London and the planned sale of the Co-op’s general insurance division.

However, bond holders have refused to take the proposals lying down and 1,700 holders of the Co-op Bank’s £53m retail bond have united behind Mark Taber of website Fixed Income Investments and written to Mark Carney at the Bank of England’s Financial Policy Committee and George Osborne questioning the plan, saying that it would hurt ‘many very elderly and vulnerable pensioners’.

Taber has accused Co-op Bank of using “scare tactics”, and claims it should sell off one of its profitable businesses such as funeral parlours to find the extra cash; the Co-op argues such a move would neither raise enough money nor allow it to tap financial markets for fresh capital.

This episode highlights the inequitable treatment of retail and institutional investors when things do begin to unravel, and makes it absolutely vital that retail clients understand the risk they are taking on in any investment (Caveat Emptor – Mr Bond Urges Caution When Purchasing 'Retail Bonds' – Retail Bond Expert 7th June 2013/ Fork ‘andles Retail Bond Expert 21st August 2013).

Many investors have been spooked by the Co-op’s insinuation that if holders do not accept the offer, the bank could either face nationalisation, or an orderly wind-down – almost certainly resulting in a total capital wipe out – and have sold their holdings at a loss.

"pensioners that depend upon income from their investments will merely be given ordinary shares"

However, Taber does not accept that the proposed equity-for-debt swap is the only option available to the bank, and points to the perceived unfairness in the fact that senior bondholders – primarily institutional investors and hedge funds – will be offered bonds in the Co-operative Group in exchange for those in the bank, whilst pensioners that depend upon income from their investments will merely be given ordinary shares.

Mr Taber believes that the Co-op should make a cash offer to investors holding retail bonds, adding that it was ‘unfair’ that they would not be told the full detail of the restructuring plans until October, and he criticised the regulator and the Co-op for failing to notify investors sooner that it was in trouble.

Less clear is the stance being taken by US vulture funds Aurelius Capital and Silver Point Capital, which have bought large positions in two of Co-op Bank’s bonds. They could prevent those two tranches approving the rescue plan which needs every class of bond to vote for it.

Whatever the outcome, this should serve as a salutary lesson for those considering an investment in retail bonds; if they have any doubt as to what protections they have and where their loan sits in the debt structure of the borrower, potential investors should always seek financial advice appropriate to their knowledge and experience.

As ever, Mr Bond would welcome your feedback, particularly if you hold Co-op retail bonds, and would know whether you plan to accept the proposal, or what alternative course of action you may seek.

Nick Gill

Posted on
13/09/2013 07:43:56

I hold about 30,000 of the 5.555% bonds in my SIPP through the Selftrade platform. Apart from my vle crash I have not heard anything from Selftrade for Co-op. how can I best be kept informed. Will I get an opportunity to ore and see a proposal. Where can I best be kept informed .